09 April 2020

HARPER: THINKING ABOUT THE POST-COVID-19 NEW NORMAL

The almost total shutdown of the U.S. and global economies as the result of the COVID-19 pandemic is unprecedented in modern times. The consequences for the global economy will be enormous and long-lasting whether the virus apex is reached in 60 days or six months. Here are some thoughts on what the post-COVID-19 state of the economy will look like.

When parts of the country and eventually all of the United States come out of economic quarantine and attempt to return to "normal," the level of economic devastation, bankruptcy and household impoverishment will be beyond what people now imagine. To maintain some level of survival, the Federal government through the Treasury Department and the Federal Reserve will have pumped in a minimum of $5-10 trillion, creating the biggest government debt crisis on record.

It has already been suggested that the Federal government will in some way take equity stakes in big companies like airlines, auto manufacturers, defense companies. In effect, in some fashion, the United States will look a lot more like China, where 80 percent of the economy is state-owned entities (SOEs). It will take a decade or more for the recovery to reach the point where the Federal government can begin to sell off these equity holdings.

Can the US manage such a situation? It will require drawing upon the private sector and entrepreneurial talents of the population to create a viable but totally new structure.

Small and medium size enterprises will suffer greatly, as many will find it impossible to reopen doors after the prolonged shutdown. This will impact the financial sector in many previously unprecedented ways, as mortgages go unpaid for months, as foreclosures are stopped but owners have no means to pay back rent and mortgage payments. Local and state governments that rely on tax revenue from these income streams will feel the effects deeply as well.

Talk of a $2 trillion infrastructure investment make sense as a source of jobs and needed economic revival. The bill of materials for such endeavors will be part of the big challenge. Where will the steel, the cement, the heavy equipment come from?

I apologize that these are somewhat random thoughts, but I hope to start a thinking process about a completely new phenomenon that no one has ever been through before in our lifetimes.

Will the United States resemble Germany at the immediate end of World War II? Less physical wreckage and rubble, but no real economy standing. What will be the psychological fallout? Will part of the new normal be adequate inventory of medical supplies to deal with a future replay of the coronavirus? Health care is now a primary national security concern and that was not the case just a few months ago.

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"80 percent of the economy is state-owned entities"

The bailout of General Motors would seem to make that a viable proposition on the face of it, but that might be only a superficial comparison. The equity position that the government was retired at a profit and the corporation regained health because enormous debt was written off. But the Retirement of the government's equity position and the debt write offs were a good bit less than entirely transparent, so who knows how successful that whole thing actually was?

In addition, such a thing would require consumer spending to restore production, and an investing base to retire the government's equity position, and where would funds for either of those vehicles come from? Not, certainly, from a population which has been existing on government handout for an extended period.

Not that I don't think you're right, but the process seems highly obscure at best. If the government starts by the "self licking ice cream cone" principle, in which consumers are buying goods with the money that they make producing those same goods, at what point does that circle start to open up?

The big winners so far are Amazon and to a lesser degree Walmart (Walmart is having problems ramping up grocery pick-up orders and don't yet deliver). If things stay the same the Global Warming/Green New Deal folks will have won, bigly. Greta told us all months ago to stop flying and driving, here we are. Had Hillary Clinton won the last election, I suspect this would be the way forward. One could envision this crisis being tailor made for her.

Alas, we have President Trump. Something tells me he has far better intel than Fauci and Birx. He's not going to be humiliated by them on stage, it will be the reverse. The numbers of fatalities will be far less than CDC predictions.

So, let's get back to work. Loss of one month's rent/mortgage payments hurts but it's not the end of the world.

Rapidly give small business loans to Mom&Pops that have had to shutdown but also encourage new Mom&Pops to open up new small businesses with liberal loans for them as well.

Tax Amazon at all levels: Federal, State, and local. End their shipping subsidies. Give the Mom&Pops tax/shipping breaks that allow them to compete favorably with Amazon and Walmart.

Make it possible for 1st time home buyers to get a loan at the lowest rates for 50 years and let them also fold any student loans into that mortgage. If it seems reasonable that they can pay it, give it to them.

I hope others have some ideas - we need to figure where we're headed. Thanks

It seems to me quite clear that – inevitably – Western societies are being dragged into a situation where they will have to become more ‘socialist’, whether they like it or not.

Another historical lesson then ‘kicks in’: in general, ‘socialistic’ measures are best managed by intelligent and pragmatic ‘capitalists’: one thinks of the role of Walter Rathenau and Lord Beaverbrook in wartime production in Germany and Britain, in the two world wars.

The last people one wants attempting to manage them are convinced ‘socialists’, like Bernie Sanders or Jeremy Corbyn.

Equally, about the last people one wants to see attempting to manage any economy are highly abstract theoretical economists, of the Larry Summers/Ben Bernanke variety.

A memorable paper, published in 1998 by Janine R. Wedel, who actually does serious ‘social science’, was entitled ‘The Harvard Boys Do Russia.’

As a student of finance and economics I fear that your outlook is not alarmist but actually understated. Fear is the little mind killer and it spooked the political class into an uncontrolled demolition of the world economy. Only time will tell if it was intentional or the equivalent of the proverbial "monkeys playing with razor blades".

1. The quality of real Infrastructure investments (roads, tunnels, rail, hospitals?, etc.) will depend on how productive these investments are. I was quite familiar with much of the "green" project investments in the post 2008 crisis stimulus bill and a very large fraction was wasted on projects that would quite predictable be failures (battery companies, etc.) or deployed more heavily subsidized technology with no plausible unsubsidized future. And areas like home energy weatherization had high fractions of shoddy work. While any funding creates near-term jobs, productive investment has a much greater impact on the economy. Non-productive investment has been a big problem in China's economy over the past as ten-fifteen years ("bridges to nowhere", etc.) greatly increasing national debt without actually growing the productive economy. Unfortunately, I suspect the House will, be pushing every green "fairy tale" into a stimulus bill, so hopefully we will at least get a similar commitment to useful infrastructure investment. The best examples of productive investment I recall from the post 2008 bill were "shovel ready" rail system improvements that many states had previously identified as critical needs and developed engineering plans for, so could move quickly to implementation.

2. We may see some beneficial business practice shifts driven by COVID. For example a local call center company, Savalinx, just announced they had hired 500 temporary workers to help answer questions, process claims and direct callers to other resources for state unemployment offices that are overwhelmed with calls from people impacted by the COVID-19 pandemic. Of further interest is that the hiring was completed within a two-week span and all new employees were able to pick up equipment and complete remote training sessions for the jobs, which will be done remotely.

3. While my pre-COVID work has involved occasional video meetings, this has become a "several daily" activity involving many more people and topics than pre-COVID. No question in my mind that many "new" participants are learning that the quality of current video meeting services (we use Bluejeans and Zoom) is much better than they had previously believed and that we may need much less travel looking forward.

4. Given our clear need to move some manufacturing and other supply chain activities back into the US, this should be yet another productive path - if effective mechanisms to move in this direction can be created.

Something slightly more immediate. Just ordered first time through Costco for a few items. (delivery has been postponed 4 times already) Online ordering and delivery may radically change as people will be wary of being in a confined space with others. If the change accelerates there may be less need for existing stores and structures. A more of a warehouse type set up with deliveries may be more efficient. I don't now when the restaurant service industry will open back up. It would ruin your veal cordon bleu in you heard your neighbor sniffling and coughing. Personalized catering for the more expensive meals in your home might be the future.

When a patient visits with their doctor and is given a troubling diagnosis their first move is not to blindly follow the prescribed remedy but to seek out a second opinion - which is exactly what should have been done before the US decided to destroy tens (hundreds?) of millions of lives via a near-complete economic shutdown.

There are dozens of medical professionals with equally impeccable credentials who have called Dr. Fauci's and Dr. Birx's (etal) diagnosis and one size fits all prescriptions - based upon inconclusive data - to control contagion of Coronavirus off the mark.

Italicized/bold text was excerpted from the web site informationclearinghouse a series of interviews titled:

Perspectives on the Pandemic

Professor Knut Wittkowski, for twenty years head of The Rockefeller University's Department of Biostatistics, Epidemiology, and Research Design, says that social distancing and lockdown is the absolutely worst way to deal with an airborne respiratory virus.

Further, he offers data to show that China and South Korea had already reached their peak number of cases when they instituted their containment measures. In other words, nature had already achieved, or nearly achieved, herd immunity.

Coronavirus, a fiasco in the making? As the coronavirus pandemic takes hold, we are making decisions without reliable data.

Dr John P.A. Ioannidis is a professor of medicine and professor of epidemiology and population health, as well as professor by courtesy of biomedical data science at Stanford University School of Medicine, professor by courtesy of statistics at Stanford University School of Humanities and Sciences, and co-director of the Meta-Research Innovation Center at Stanford (METRICS) at Stanford University.

Dr. Jay Bhattacharya is a professor of medicine at Stanford University. He is a research associate at the National Bureau of Economic Research and a senior fellow at both the Stanford Institute for Economic Policy Research and the Stanford Freeman Spogli Institute.

Italcized/bold text was excerpted from an open letter to German Chancellor Merkle which was authored by Dr. Sucharit Bhakdi, Professor Emeritus of Medical Microbiology:

As Emeritus of the Johannes-Gutenberg-University in Mainz and longtime director of the Institute for Medical Microbiology, I feel obliged to critically question the far-reaching restrictions on public life that we are currently taking on ourselves in order to reduce the spread of the COVID-19 virus.

It is expressly not my intention to play down the dangers of the virus or to spread a political message. However, I feel it is my duty to make a scientific contribution to putting the current data and facts into perspective – and, in addition, to ask questions that are in danger of being lost in the heated debate.

The reason for my concern lies above all in the truly unforeseeable socio-economic consequences of the drastic containment measures which are currently being applied in large parts of Europe and which are also already being practiced on a large scale in Germany.

Prof. Jihad Bishara, the director of the Infectious Disease Unit at Petah Tikva’s Beilinson Hospital, said that some of the steps being taken in Israel and abroad were very important, but the virus is not airborne, most people who are infected will recover without even knowing they were sick, the at-risk groups are now known, and the global panic is unnecessary and exaggerated.

“I’ve been in this business for 30 years,” Bishara said in a Channel 12 interview. “I’ve been through MERS, SARS, Ebola, the first Gulf war and the second, and I don’t recall anything like this. There’s unnecessary, exaggerated panic. We have to calm people down.

Italicized/bold text was excerpted from Tech Start Ups an interview with Dr. Shiva Ayyadurai, an MIT scientist with 4 PHD degrees and a researcher on the human immune system titled:

Coronavirus lies and media fear mongering: MIT Biologist doubles down his attack on “Deep State and FakeScience” slamming Big Pharma, CDC, WHO, China and asking U.S. President to fire Dr. Fauci

“The current trajectory of Dr. Anthony Fauci’s public ‘health’ policy will result in the short- and long-term destruction of our citizen’s immune health as well as our nation’s economic health – perhaps a conscious and intended goal. Dr. Fauci’s policy, at best, is based on a 1950s outdated ‘one-size-fits-all,’ non-personalized approach to medicine and public health; and, at worst is derived from a ‘fake science’ understanding of the immune system – one, which Dr. Fauci, over five decades has perpetuated, and exploited to build his career.”

Italicized/bold text was excerpted from a report found at The New England Journal of Medicine (co authored by Dr. Fauci) titled:

Covid-19 — Navigating the Uncharted

On the basis of a case definition requiring a diagnosis of pneumonia, the currently reported case fatality rate is approximately 2%.4 In another article in the Journal, Guan et al.5 report mortality of 1.4% among 1099 patients with laboratory-confirmed Covid-19; these patients had a wide spectrum of disease severity. If one assumes that the number of asymptomatic or minimally symptomatic cases is several times as high as the number of reported cases, the case fatality rate may be considerably less than 1%. This suggests that the overall clinical consequences of Covid-19 may ultimately be more akin to those of a severe seasonal influenza (which has a case fatality rate of approximately 0.1%) or a pandemic influenza (similar to those in 1957 and 1968) rather than a disease similar to SARS or MERS, which have had case fatality rates of 9 to 10% and 36%, respectively.2

Positing a Coronavirus vaccine will be a panacea which will allow people to get on with their lives as before the fearmongering began is a complete misnomer as even in a good year influenza vaccine effectiveness straddles the averages at 50%.

Italicized/bold text was excerpted from cdc a report titled:

Vaccine Effectiveness: How Well Do the Flu Vaccines Work?

CDC conducts studies each year to determine how well the influenza (flu) vaccine protects against flu illness. While vaccine effectiveness (VE) can vary, recent studies show that flu vaccination reduces the risk of flu illness by between 40% and 60% among the overall population during seasons when most circulating flu viruses are well-matched to the flu vaccine.

Methinks due to emergency the government should use NSA data to trace all hidden funds and take measures to recover at least the tax-evasion parts thereof with possible fines. Last I heard there are multi trillions in hidden accounts in Delaware, Nevada, Cayman Island and numerous British dependencies.

In many ways we have a redux of 2008. The Fed and Treasury have determined to bailout speculative capital and big corporations and let small businesses fail and the working poor employed by small business to become even more impoverished.

Listen to Chamath Palihapitiya, CEO of investment firm Social Capital make the point that bailing out Wall St speculative losses does not do much for the real economy.

Part of a clear-eyed and needed interview with @chamath on why using bailout funds to prop up speculative assets and junk - rather than help to individuals - is reckless trickle-down madness.

As Ben Hunt tweeted today.

Futures just got a bump on news that Fed will now buy HY corp debt via ETF purchases.

Nothing matters.

So the Fed is now going to buy junk bonds, bailing out Wall St speculation in reaching for yield fostered by the Fed’s own policy of artificially suppressing rates. How long before the Fed buys the S&P ETF to follow the BOJ and the SNB? For those opposed to socialism is this effective partial nationalization of publicly traded private enterprises acceptable? Wall St loves this socialism as it allows speculative losses to be socialized while speculative gains are privatized. Of course those with significant financial assets (not the bottom 90%) will like this goosing of their holdings.

Consider the challenges that Congress will go through to put together a $2 trillion infrastructure spend and compare it to the likely $10 trillion spent by the Fed and Treasury to cover speculative losses on financial assets. It would seem that every crisis is an opportunity for those with the wealth and consequently political power to extract even more at the expense of the working class.

The elites keep betting, successfully so far, that the majority of the citizens will be satisfied with bread and circuses while their standard of living gets slowly eroded and their despondency drives them to drugs and suicide.

As many of you know I lived in occupied Germany in the immediate post-war period, first in Bremen and then in Frankfurt am Main. For the first year of so of the occupation the emphasis was on punishing Germany and the occupying powers more or less were content to watch them starve or almost starve in a country in which agriculture limped along in the circumstance of the poverty of the farmers themselves. The currency was also worthless until the occupiers created a new currency, the Deutsche Mark. Then Marshall and Clay persuaded Truman to seek to rebuild a new Germany. The Marshall Plan followed and a lot of other programs. I suspect that Harper is far too optimistic about the shambles that would exist in the US following anything more than a very few months of enforced destruction of the economy and virtual house arrest for the people. We would live in a country in which the federal bureaucracy served to rule all in the midst of poverty. There will be no Marshall Plan for us.

You seem ignorant of the terms of the bail-outs. You missed the part about the small business bailouts? You call things like the airline industry "speculative assets?" you think the US can exist without the airlines. When was the last time you drove coast to coast?

Thank you for posting this discussion Harper. I am much more optimistic about at least the U.S. and Australian economies. I regard what is happening as creative destruction. There is going to be a lot of pain, much of it self inflicted, but the economy will rise from the ashes, stronger than ever.

The big “if” in this matter is, as Col. Lang, observed, the role of the so called public service. It is currently a self licking ice cream cone - millions of public servants administering layers of convoluted and pointless laws and regulations. This has to be severely pruned because new business start ups cannot afford the BS about inclusion, diversity, gender equity, sustainability, LBGTQ, glass ceilings, etc., etc. The regulations and the drones who administer them have to go.

If this does happen, natural human creativity and industry will flourish very quickly, building new businesses out of the rubble. If it does NOT happen, and the elites combine with the public service to maintain their positions, you will be headed for a two tier economy - legal and illegal, and that will destroy society. That would be something like Central America on steroids - gangs, cartels, bribery and corruption, breakdown of law enforcement, etc.

I need to explain the motivation big corporations have for fearing renewal and clinging to the status quo. It is to do with growth and thus share price. If new businesses spring up, the share of GDP growth of the small business sector will increase faster than the corporations, it will lower their share price. The corporations will NOT want to see any reduction in red tape because it will stimulate the small business sector at their expense.

I am also discounting robber baron behaviour by the 1%, but that is another subject.

My opinion is formed by my experience in the great Australian recession circa 1990. As general manager of a manufacturing business, I had to fire 70 staff, renegotiate all our contracts, prune costs and get the company into survival mode. My reward after doing that was to be fired myself as the owners decided to manage the business themselves after I had done the hard and bitter work. I was unemployed for 18 months. I saw a lot of people and businesses go under and watched people pick themselves up and start again.

I reiterate that right now is the best time to start a new business. Let the old economy go. Did you really believe we could prosper through a service economy composed of dog grooming salons and personal trainers? An economy where prudence and thrift has been punished? An economy that consumes products that can’t be repaired? All produced across the seas? Let it go.

I do not know what the future holds. Our retirement savings are probably shot. In December we were looking forward to two months of summer in Italy, Sardinia, Sicily, a yacht charter in Croatia and a week in the serene republic. All gone. Do not sell America short. It will bounce back if given the chance.

Remind me again which execuive order Barack and numerous state governors used to order people not to go to work?

Norbert,

You mean the government should spy on its own citizens like Obama spied on the Trump campaign? Did you see the CBS publication of part of the Papadopolus transcript?
"CBS News has reviewed the raw transcript of the conversation between George Papadopoulos and the confidential source working for the FBI, and has published key excerpts."https://www.scribd.com/document/455641630/Transcript#from_embed

I’m just pointing out the disparity. Comparing the amounts going to the real economy vs the amount going to back financial speculation.

We have $350 billion for small businesses for 2.5 months of payroll protection. $1,200 one-time payment to individuals. $500 billion in loans and loan guarantees to large corporations. $100 billion in grants to hospitals. Airlines get $29 billion in grants and another $29 billion in loans. State & local government get $150 billion and the Pentagon gets an additional $10 billion.

Compare to the trillions that the Fed is using to hand out to private equity, hedge funds and other financial speculators.

We’ll see how long it will take for Congress to put together a $2 trillion infrastructure bill that will help the real economy. In the same time let’s see how big the amount of largesse is showered on financial speculators and foreign banks by the Fed. I’m willing to wager that in a year’s time the amount that was invested in the real economy would be multiples less than what is provided to financial speculators.

"We would live in a country in which the federal bureaucracy served to rule all in the midst of poverty. "

I agree with you. Michigan's governor seems determined to ruin the economy of the state with extending the stay at home order and not easing any restrictions anywhere in the state. Good thing they never got anywhere with the high speed rail to Ann Arbor or my state rep, senator, and the county commissioner who was Dingell's chief of staff might actually have to face some risk, but they are quite happy to lock down the UP and every town in the state though it looks like metropolitean Detroit is the major and almost only hotspot.

I find it interesting to see the difference in responses and reporting between states. In FL where I also have relatives the case load and death rate is much different than Michigan, even though Florida has 11 million more people and more of them are over 65, but less that 400 have died vs. more than 1,000 in Michigan.

Michigan, there's a whole lot of upper penisula with what looks like little risk; it leads me to believe all the "red state" rural areas are having their economies destroyed by politically driven govornment order. This includes all the community hospitals that have zero revenue becuase they can perform no non-emergency service. This can't go on much longer. https://www.michigan.gov/coronavirus/

Below is a link to the growth in the Fed's balance sheet over the past few months. You will note that the Fed began expanding its asset purchases by $500 billion in the last quarter of 2019 even before the China virus hit our shores and shutdown our economy. Credit was already leaking and the Fed which has given itself the mandate to backstop financial speculation was already delivering on the Fed put. The China virus has brought out the bazooka adding nearly $2 trillion to their balance sheet just in the last 30 days.

The Fed has announced several new programs in addition to the repo program it had already initiated last year for liquidity squeezed banks. One is the purchase of investment grade corporate bonds many trading close to junk. The second announced today is the purchase of junk bonds via ETFs. This allows financial investors holding these credit instruments to sell them to the Fed enabling them to essentially not take or reduce their losses. The Fed will now hold credit instruments that could default. The third is to provide dollar liquidity to foreign banks with dollar liabilities through their central banks. Essentially the Fed is now willing to buy assets no matter how dodgy with significant credit risk.

An example is the shale patch debt. Shale E&P companies raised junk bond financing to explore and produce oil & gas. With the crushing of the oil price, much of that debt got downgraded. Investors holding that debt were sitting on significant losses. The Fed will now buy that debt from investors with an opaque pricing essentially making them whole.

This is very similar to what they did during the 2008 mortgage credit crisis when they purchased mortgage-backed securities from investors enabling them to get out from their underwater positions. At that time Bernanke said that it was emergency action to prevent the collapse of the financial system and they would reduce their balance sheet by selling all the securities they acquired when the financial system was able to stand up again. Now they're significantly higher than at the peak of the 2008 crisis.

Chamath and others like Jack are upset because if the Fed really wanted to help the actual economy they could monetize (print money to buy up) infrastructure bonds issued by the various state, and local municipalities that could run various construction projects. They could also monetize Treasury, state and municipal debt that could be used to pay all those locked down and unable to earn a paycheck. What they're doing here as they did in 2008 is to backstop speculative losses of the financial sector.

The other story is that post-2008 it became clear to large speculators that risk taking is rewarded as long as the scale was large enough. The use of debt to buyback stock to the outsized benefit of management was immense in scale. So too was the revived CLO and other structured debt product financings. The impending downgrade of much of this corporate debt to junk meant that all those securities would have to be ejected from the portfolios that could only hold investment grade. Like most pension funds and life insurance portfolios. This was a huge crisis for the massively leveraged funds.

I work at an investment advisory firm providing services to pension funds and insurance companies. The word on the street is to expect the Fed balance sheet to be expanded by $6-$10 trillion.

Unfortunately Mom & Pop businesses most hard hit by the shutdown have no ability to get a Wall St bank to underwrite a junk bond offering that could be sold to the Fed.

Finally, I'd like to leave you with this story. This is why some are getting angry.

Instead of talking about the post-COVID world, let me point that the crisis is an opportunity for the USA as well.

It is quite clear by now that China is bullying weaker nations that needs medical equipements and tests (be nice to them or else). It is also doing crazy price gouging (ventilators for 3 times the previous price and without a garanteed delivery, for example). Last but not least, some of the stuff they are selling are sub-quality or just does not work.

Well, the USA still has its own industrial might and it can win major points and business in the World after getting its house in shape by just not being a greedy and spiteful monsters in the next few months.